2] Cash payments to
acquire shares or interest in joint ventures (other than the cases where
instruments are considered as cash equivalents)

3] Cash advances and
loans made to third parties (Loan sanctioned by a financial enterprise is
operating activity)

4] Dividends and
Interest received

5] Cash flows from
acquisitions and disposal of subsidiaries

Financing
Activities are activities that result in changes in the size and composition
of the owners’ capital (including preference share capital in the case of a
company) and borrowing of the enterprise.

Example:

1] Cash proceeds from
issue of shares and debentures

2] Buy back of shares

3] Redemption of
Preference shares or debentures

4] Cash repayments of
amount borrowed.

5] Dividend and
Interest paid

An enterprise should
report separately major classes of gross cash receipts and gross cash payments
arising from investing and financing activities.

However, cash flows
from following activities may be reported on a net basis.

vCash receipts and payments on behalf of
customers

For example: Cash collected on behalf of, and paid
over to, the owners of properties.

vCash flows from items in which turnover is
quick, the amounts are large and the maturities are short.

For example: Purchase and sale of investments

vFor financial enterprise: Cash receipts
and payments for the acceptance and repayment of deposits with a fixed maturity
date.

vFor financial enterprise: Cash advances
and loans made to customers and the repayment of those advances and loans.

Foreign Currency
Cash Flows:

Cash
flows arising in foreign currency should be recorded in enterprise’ reporting
currency applying the exchange conversion rate existing on the date of cash
flow.

The
effect of changes in exchange rates of cash and cash equivalents held in
foreign currency should be reported as separate part of the reconciliation of
the changes in cash and cash equivalents during the period.

Extraordinary
Items: These items should be separately shown under respective heads of
cash from operating, investing and financing activities.

Investing
and financing transactions that do not require the use of cash and cash
equivalents should be excluded from a cash flow statement. For Example

A]
The conversion of debt to equity

B]
Acquisition of an enterprise by means of issue of shares

Other
Disclosure:

Components of cash
and cash equivalents.

Reconciliation of
closing cash and cash equivalents with items of balance sheet.

The amount of
significant cash and cash equivalent balances held by the enterprise, which are
not available for use by it.

in the form of
materials or supplies to be consumed in the production process or in the
rendering of services.

However,
this standard does not apply to the valuation of following inventories:

(a)WIP arising under construction contract (ReferAS
– 7);

(b)WIP arising in the ordinary course of business of
service providers;

(c)Shares, debentures and other financial instruments held
as stock in trade; and

(d)Producers’ inventories of livestock, agricultural and
forest products, and mineral oils, ores and gases to the extent that they are
measured at net realizable value in accordance with well established practices
in those industries.

Inventories
should be valued at the lower of cost and net realizable value.

The
cost of inventories should comprise

(a)all costs of purchase

(b)costs of conversion

(c)other costs incurred in bringing the inventories to
their present location and condition.

The costs
of purchase consist of

(a)the purchase price

(b)duties and taxes ( other than those subsequently
recoverable by the enterprise from the taxing authorities like CENVAT credit)

(c)freight inwards and other expenditure directly
attributable to the acquisition.

Trade
discounts (but not cash discounts), rebates, duty drawbacks and other similar
items are deducted in determining the costs of purchase.

The costs
of conversion include direct costs and systematic allocation of fixed and
variable production overhead.

Allocation
of fixed overheads is based on the normal capacity of the production
facilities. Normal capacity is the production, expected to be achieved on an
average over a number of periods or seasons under normal circumstances, taking
into account the loss of capacity resulting from planned maintenance.

Under Recovery:
Unallocated overheads are recognized as an expense in the period in which they
are incurred.

Example: Normal capacity = 20000 units

Production = 18000 units

Sales = 16000 units

Closing Stock = 2000
units

Fixed Overheads = Rs. 60000

Then,
Recovery rate = Rs60000/20000 = Rs 3 per unit

Fixed Overheads will be bifurcated into
three parts:

Cost of
sales : 16000*3 = 48000

Closing stock : 2000 *3
= 6000

Under recovery : Rs 6000 ( to be charged to P/L)

(Apparently
it seems that fixed cost element in closing stock should be 60000/18000*2000
=Rs 6666.67. but this is wrong as per AS-2)

Over Recovery: In period of high production, the
amount of fixed production overheads is allocated to each unit of production is
decreased so that inventories.

Example: Normal
capacity = 20000 units

Production = 25000 units

Sales = 23000 units

Closing Stock = 2000
units

Fixed Overheads = Rs 60000

Recovery
Rate = Rs 60000/20000 = Rs 3 per unit

But,
Revised Recovery rate = Rs
60000/25000 = Rs. 2.40 per unit

Cost
of sales :
23000*2.4 = Rs 55200

Closing
Stock : 2000 *2.4 =
Rs. 4800

Joint or by products:

In
case of joint or by products, the costs incurred up to the stage of split off
should be allocated on a rational and consistent basis. The basis of allocation
may be sale value at split off point or sale value at the completion of
production. In case of the by products of negligible value or wastes, valuation
may be taken at net realizable value. The cost of main product is then joint
cost minus net realizable value of by product or waste.

The
other costs are also included in the cost of inventory to the extent they
contribute in bringing the inventory to its present location and condition.

Interest
and other borrowing costs are usually not included in cost of inventory.
However, AS-16 recommends the areas where borrowing costs are taken as cost of
inventory.

Certain
costs are strictly not taken as cost of inventory.

(a)Abnormal amounts of wasted materials, labour, or other
production costs;

(b)Storage costs, unless those costs are necessary in the
production process prior to a further production stage;

(c)Administrative overheads that do not contribute to
bringing the inventories to their present location and condition; and

(d)Selling and Distribution costs.

Cost
Formula:

ðSpecific
identification method for determining cost of inventories

Specific
identification method means directly linking the cost with specific item of
inventories. This method has application in following conditions:

·In case of purchase of item specifically
segregated for specific project and is not ordinarily interchangeable.

·In case of goods of services produced and
segregated for specific project.

ðWhere Specific Identification method is not
applicable

The
cost of inventories is valued by the following methods;

FIFO ( First In
First Out) Method

Weighted Average
Cost

Cost of inventories in certain conditions:

The following methods may be used for convenience if the
results approximate actual cost.

ðStandard Cost: It takes into account
normal level of consumption of material and supplies, labour, efficiency and
capacity utilization. It must be regularly reviewed taking into consideration
the current condition.

ðRetail Method: Normally applicable for
retail trade

Cost of inventory is determined by reducing the gross margin from the
sale

value of inventory.

Net
Realisable Value means the estimated selling price in ordinary course of
business, at the time of valuation, less estimated cost of completion and
estimated cost necessary to make the sale.

Comparison
between net realizable value and cost of inventory

The
comparison between cost and net realizable value should be made on item-by-item
basis. (In some cases, group of items-by-group of item basis)

For
Example:

Cost NRV Inventory Value as per AS-2

Item
A 100 90 90

Item
B 100 115 100

Total 200 205 200190

Raw
material valuation

If
the finished goods to which raw material is applied, is sold at profit, RAW
MATERIAL is valued at cost irrespective of its NRV level being lower to its
costs.